That is a great effect.

I would think its the same principle as the swf files that have eyes that follow the cursor ( detecting the angle between the cursor and a object ). Instead of having eyes moving you go to different frames in a movieclip ( the bird would be a movieclip with a certain position per frame, and which frame that is shown is dependent on the cursor angle ).

The sizing of the bird is simply detecting where it is on a y basis.

The movement ( when it follows the cursor ) is a simple easing script.

// On the bird mc
onClipEvent(enterFrame){
this._x+=(_root._xmouse-this._x)/7;
this._y+=(_root._ymouse-this._y)/7;
}